What Racial Inequality Means When You Go to the Bank
(Bloomberg) -- Protests over racial injustice that started over police brutality are now raising questions for American banks. Critics say Wall Street has contributed to stark racial gaps in income and wealth. They argue lenders have long withheld credit from African-American businesses and homeowners and charged them higher rates. There’s even a hashtag, #BankingWhileBlack, for sharing experiences of racial profiling in bank branches. And African-American businesses were at a disadvantage this spring in getting federal emergency loans.
1. What kind of bank practices hurt Black people in the past?
Probably the most notorious one is redlining. Beginning in the 1930s, a federal agency called the Home Owners’ Loan Corporation assigned grades to neighborhoods based on criteria including the race and class of residents. Areas that got the lowest grade were deemed “hazardous” to lend to and color-coded red on maps -- hence the term. The practice made it difficult for Black people to get mortgages in the U.S. for decades. Though redlining was outlawed under the Fair Housing Act in 1968, its effects live on.
2. How big was its impact?
According to a 2018 study by the National Community Reinvestment Coalition, the economic and racial segregation caused by redlining persists today: 74% of the neighborhoods the federal government deemed “hazardous” to lend to nearly a century ago are low to moderate income today, and 64% of them are minority neighborhoods. By hindering home purchases, redlining limited the opportunity for Black families to build wealth. In 2016, the typical Black family had just 10% of the wealth of the typical White family, according to the Federal Reserve Bank of St. Louis.
3. What’s been done about that?
The Community Reinvestment Act was enacted in 1977 to undo redlining, requiring banks to meet the credit needs of their local communities in which they had branches or collected deposits by providing mortgages, small business loans and other activities. Earlier this year, the banking industry scored a partial victory in a long effort to make it easier to comply with the CRA, by shifting the emphasis from the number of loans made in low-income communities to dollar amounts, as well as getting credit for infrastructure projects. Backers say the change will spur investment in poor areas, while fair-lending advocates have condemned the moves as gutting the law. The Federal Reserve has said that it will not join the Office of the Comptroller of the Currency in the proposal but is coming up with its own plan to update the act for the first time since the 1990s. Congress also moved earlier this month to reverse the OCC’s changes.
4. How about general banking services?
About 17% of Black households in the U.S. were unbanked, or lacking a checking or savings account, according to a 2017 study by the Federal Deposit Insurance Corp. An additional 30% were underbanked, meaning they had a checking or savings account but also used alternative financial services such as money orders, check cashing, international remittances or payday loans. For White households, just 3% were unbanked and 14% underbanked.
5. How about access to credit?
About 35% of African-American families have been denied credit or feared such rejection, compared with 15% of White families, a Federal Reserve survey of consumer finances found. Black Americans’ reliance on credit cards goes hand in hand with the country’s pervasive wealth gap. Nearly half of all African-American families in the U.S. carry some form of card debt, often considered the most expensive form of credit. And 10% of Black families are more than two months late on their payments, double the percentage of White families. While African-American households typically carry average credit-card debt of $5,784 with interest charged at 17.7%, their White counterparts typically have higher debts of $7,315 with a lower annual percentage rate averaging 15.8%, according to a survey by the NAACP.
6. What role does bias play in that?
It’s hard to say, but advocates point to systemic issues as well as potential racism on the part of individual employees. Credit-card companies often rely on alternative data to help them instantly offer credit decisions to potential customers, but those systems can rely on faulty data and can also result in Black people receiving worse credit terms than White applicants.
7. What’s the impact of biased lending?
The 2008 financial crisis provides a stark example. Fueled by the subprime mortgage boom and bust, the downturn that followed the crisis had an outsize impact on Black people and widened the wealth gap between Black families and White families. Borrowers of color were more than twice as likely to lose their homes as White people, according to a 2011 paper from the Center for Responsible Lending. “Throughout the subprime market, Black borrowers stood a significantly higher chance of receiving higher-cost and higher-risk loans than White borrowers, even when controlling for factors related to creditworthiness,” a 2013 study from the American Civil Liberties Union concluded.
8. What’s happening in the pandemic?
African-American businesses have in general been disadvantaged when it comes to banking, but that’s played out in a very visible way after Congress allocated billions for emergency, forgivable loans for small and medium-size businesses. Black-owned businesses found it harder to get such loans. The loans were processed by banks, many of which gave priority to existing borrowers. Because Black-owned enterprises are typically underrepresented among bank clients, they were at greater risk of being left out.
9. How have banks responded to the protests?
Like many in corporate America, bank leaders have rushed to denounce racism and offer overtures to minority groups after the nationwide protests over the death of George Floyd and other unarmed Black people killed by police. Wells Fargo & Co. linked executives’ compensation to workforce diversity. Bank of America Corp. pledged $1 billion over four years to address racial and economic inequality. Goldman Sachs Group Inc. pledged to create a $10 million fund for grants. Many of the corporate statements were “for show,” wrote Robert Reich, the Clinton-era labor secretary who now researches public policy at the University of California, Berkeley. In a Guardian op-ed, Reich described examples of companies working against the interests of people of color, such as redlining.
10. What else might they do?
As the spotlight turns to banks’ role in perpetuating economic gaps, they should help more minority-owned and women-owned companies tap markets, buy from more diverse suppliers and extend more credit in underserved communities, says Cynthia DiBartolo, CEO of broker-dealer Tigress Financial Partners. “This has to be more than just lip service,” she said of banks’ recent statements. “There has to be some soul-searching.”
The Reference Shelf
- An essay by Raphael Bostic, the first Black Federal Reserve president, on the moral and economic imperative to end racism.
- The St. Louis Fed’s report on wealth inequality in America.
- Charting of racial disparities in the U.S., where Black people lag other groups by nearly every economic measure.
- A New York Times article on “Banking While Black.”
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